News Column

SABRA HEALTH CARE REIT, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

August 4, 2014

The discussion below contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those which are discussed in the "Risk Factors" section in Part I, Item 1A of our 2013 Annual Report on Form 10-K. Also see "Statement Regarding Forward-Looking Statements" preceding Part I. The following discussion and analysis should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto. Our Management's Discussion and Analysis of Financial Condition and Results of Operations is organized as follows: Overview Recent Transactions



Critical Accounting Policies

Recently Issued Accounting Standards Update

Results of Operations

Liquidity and Capital Resources

Concentration of Credit Risk

Skilled Nursing Facility Reimbursement Rates

Obligations and Commitments

Off-Balance Sheet Arrangements

Overview

We were incorporated on May 10, 2010 as a wholly owned subsidiary of Sun Healthcare Group, Inc. ("Old Sun"), a provider of nursing, rehabilitative and related specialty healthcare services principally to the senior population in the United States. Pursuant to a restructuring plan by Old Sun, Old Sun restructured its business by separating its real estate assets and its operating assets into two separate publicly traded companies, Sabra and SHG Services Inc. (which was then renamed "Sun Healthcare Group, Inc." or "Sun"). In order to effect the restructuring, Old Sun distributed to its stockholders on a pro rata basis all of the outstanding shares of common stock of Sun (this distribution is referred to as the "Separation"), together with an additional cash distribution. Immediately following the Separation, Old Sun merged with and into Sabra, with Sabra surviving the merger and Old Sun stockholders receiving shares of Sabra common stock in exchange for their shares of Old Sun common stock (this merger is referred to as the "REIT Conversion Merger"). The Separation and REIT Conversion Merger were completed on November 15, 2010, which we refer to as the Separation Date. Following the restructuring of Old Sun's business and the completion of the Separation and REIT Conversion Merger, we began operating as a self-administered, self-managed REIT that, directly or indirectly, owns and invests in real estate serving the healthcare industry. Our investment portfolio is primarily comprised of skilled nursing/post-acute facilities, senior housing facilities, acute care hospitals, debt investments and preferred equity investments. We expect to continue to grow our portfolio primarily through the acquisition of senior housing and memory care facilities and with a secondary focus on acquiring skilled nursing facilities. We have and will continue to opportunistically acquire other types of healthcare real estate (including acute care hospitals) and originate financing secured directly or indirectly by healthcare facilities. We also expect to grow our portfolio through the development of purpose-built healthcare facilities through pipeline agreements and other arrangements with select developers. We further expect to work with existing operators to identify strategic development opportunities. These opportunities may involve replacing or renovating facilities in our portfolio that may have become less competitive and new development opportunities that present attractive risk-adjusted returns. In addition to pursuing acquisitions with triple-net leases, we expect to continue to pursue other forms of investment, including investments in senior housing through RIDEA-compliant structures, mezzanine and secured debt investments, and joint ventures for senior housing, memory care and skilled nursing assets. With respect to our debt investments, in general, we originate loans in situations where an attractive investment opportunity is presented but either (a) the property is under development or (b) the property is completed but the operations of the facility are not yet stabilized. A key component of our strategy related to loan originations is the option to purchase the underlying real estate that secures our loan investments. These options become exercisable upon the occurrence of various criteria, such as the passage of time or the achievement of certain operating goals, and the purchase price is set based on the same valuation methods we use to value our investments in healthcare real estate. This strategy allows us to diversify our revenue streams, build relationships with operators and developers, and provides us with the option to add newer properties to 28



--------------------------------------------------------------------------------

Table of Contents

our existing real estate portfolio if we determine that those properties enhance our investment portfolio and stockholder value at the time the options are exercisable. As we acquire additional properties and expand our portfolio, we expect to further diversify by tenant, asset class and geography within the healthcare sector. We employ a disciplined, opportunistic approach in our healthcare real estate investment strategy by investing in assets that provide attractive opportunities for dividend growth and appreciation of asset values, while maintaining balance sheet strength and liquidity, thereby creating long-term stockholder value. We elected to be treated as a REIT with the filing of our U.S. federal income tax return for the taxable year beginning January 1, 2011. We believe that we have been organized and have operated, and we intend to continue to operate, in a manner to qualify as a REIT. We operate through an umbrella partnership (commonly referred to as an UPREIT) structure in which substantially all of our properties and assets are held by Sabra Health Care Limited Partnership, a Delaware limited partnership (the "Operating Partnership"), of which we are the sole general partner, or by subsidiaries of the Operating Partnership. Recent Transactions Revolving Credit Facility As of July 30, 2014, we received over $500.0 million in lender commitments for a new unsecured revolving credit facility. The total availability under the agreement is expected to be $500.0 million with an accordion feature for up to $250.0 million of additional capacity. The terms will include a four year term with a one-year extension option and improvements in pricing across the pricing matrix including an improvement of 90 basis points based on our leverage as of June 30, 2014. The lender commitments are non-binding and are subject to the parties' negotiation of final terms, and there is no assurance that we will enter into any new unsecured revolving credit facility on the terms set forth above or at all. Equity Offering On May 12, 2014, we completed an underwritten public offering of 8.1 million newly issued shares of our common stock pursuant to an effective registration statement. We received net proceeds, before expenses, of $219.1 million from the offering, after giving effect to the issuance and sale of all 8.1 million shares of common stock (which included 1.1 million shares sold to the underwriters upon exercise of their option to purchase additional shares), at a price to the public of $28.35 per share. We used a portion of the proceeds from the offering to repay $192.0 million then-outstanding under our Revolving Credit Facility. The remaining proceeds to us will be used to fund possible future acquisitions or for general corporate purposes. Mortgage Debt Repayment On May 1, 2014, we repaid $29.8 million of existing variable rate mortgage indebtedness with proceeds from our Revolving Credit Facility. As a result of our recent financing activities, we have reduced our weighted-average effective interest rate, excluding borrowings under our Revolving Credit Facility, to 5.17% per annum from 5.96% per annum as of December 31, 2013. Also, excluding borrowings under our Revolving Credit Facility, all our borrowings are now at fixed interest rates and we have no significant debt maturities until 2021. Park Place Acquisition On April 29, 2014, we acquired a senior housing campus in Fort Wayne, Indiana ("Park Place") with a total of 140 units (24 independent living units, 76 assisted living units and 40 memory care units) for $23.8 million. Park Place is encumbered by a HUD-insured mortgage with an outstanding principal balance of approximately $14.1 million and an annual interest rate of 4.84%. At closing, $1.1 million of the purchase price was used to repay an interim loan made by us to affiliates of the Leo Brown Group, the operator of Park Place, and we assumed the $14.1 million HUD-insured mortgage, resulting in a cash investment of $8.6 million. Concurrently with the purchase, we entered into a triple-net master lease agreement with affiliates of the Leo Brown Group. The lease has an initial term of 15 years with two renewal options of five years each and provides for an annual rent escalator of the greater of (i) Consumer Price Index ("CPI") and (ii) 3.0%, but not to exceed 4.0%, resulting in annual lease revenues, determined in accordance with GAAP, of $2.2 million and an initial yield on cash rent of 7.38%. Critical Accounting Policies Our condensed consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial 29



--------------------------------------------------------------------------------

Table of Contents

statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our 2013 Annual Report on Form 10-K filed with the SEC. There have been no significant changes to our critical accounting policies during the six months ended June 30, 2014. Recently Issued Accounting Standards Update In May 2014, the the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance specifically notes that lease contracts with customers are a scope exception. ASU 2014-09 is effective for the first interim period within annual reporting periods beginning after December 15, 2016, and early adoption is not permitted. We are are currently in the process of evaluating the impact the adoption of ASU 2014-09 will have on our financial position or results of operations. In April 2014, the FASB issued ASU No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"), which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The standard no longer precludes presentation as a discontinued operation if (i) there are operations and cash flows of the component that have not been eliminated from the reporting entity's ongoing operations, or (ii) there is significant continuing involvement with a component after its disposal. ASU No. 2014-08 is effective for public entities for interim and annual periods beginning after December 15, 2014, and will be applied prospectively. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements. Results of Operations As of June 30, 2014, our investment portfolio included 130 real estate properties held for investment, 12 investments in loans receivable and five preferred equity investments. As of June 30, 2013, our investment portfolio included 120 real estate properties held for investment, four investments in loans receivable and two preferred equity investments. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of investments made in 2014 and 2013 that we have owned for an entire period and anticipated future investments. The results of operations presented for the three and six months ended June 30, 2014 and 2013 are not directly comparable due to the increase in investments made subsequent to the beginning of the respective comparable period in the preceding year. 30



--------------------------------------------------------------------------------

Table of Contents

Comparison of results of operations for the three months ended June 30, 2014 versus the three months ended June 30, 2013 (dollars in thousands):

Increase due to Three Months Ended June 30, Acquisitions and Percentage Originations Remaining Increase 2014 2013 Increase Difference (1) (Decrease) (2) Revenues: Rental income $ 37,485$ 31,518$ 5,967 19 % $ 6,561 $ (594 ) Interest and other income 5,488 757 4,731 625 % 3,636 1,095



Expenses:

Depreciation and amortization 9,755 8,222 1,533 19 % 2,032 (499 ) Interest 10,994 10,143 851 8 % - 851 General and administrative 7,926 3,422 4,504 132 % 244 4,260 Other (expense) income: Loss on extinguishment of debt (162 ) (9,750 ) 9,588 98 % - 9,588 Other income (expense) 660 (1,400 ) 2,060 147 % - 2,060 (1) Represents the dollar amount increase for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 as a result of investments made on or after April 1, 2013. (2) Represents the dollar amount increase (decrease) for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 that is not a direct result of investments made after April 1, 2013. Rental Income During the three months ended June 30, 2014, we recognized $37.5 million of rental income compared to $31.5 million for the three months ended June 30, 2013. The $6.0 million increase in rental income is primarily due to an increase of $6.6 million from properties acquired on or after April 1, 2013, partially offset by a decrease of $0.6 million in rental income from properties acquired before April 1, 2013. The $0.6 million decrease is primarily due to a $0.2 million decrease related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity and a $0.2 million decrease due to the senior housing facility that is part of our RIDEA-compliant joint venture. The rental revenue related to the senior housing facility that is part of our RIDEA-compliant joint venture is eliminated upon consolidation. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and there is no contingent rental income that may be derived from our properties. Interest and Other Income During the three months ended June 30, 2014, we recognized $5.5 million of interest and other income compared to $0.8 million for the three months ended June 30, 2013. Interest and other income during the three months ended June 30, 2014 primarily consisted of income earned on our 12 loans receivable investments and preferred dividends on our five preferred equity investments. Our loans receivable investments and preferred equity investments had a combined book value of $225.8 million as of June 30, 2014. Interest and other income during the three months ended June 30, 2013 primarily consisted of income earned on our four loans receivable investments and preferred dividends on our two preferred equity investments. These investments had a combined book value of $43.1 million as of June 30, 2013. Interest and other income during the three months ended June 30, 2014 also includes operating revenues associated with the consolidation of our RIDEA-compliant joint venture. As a result of consolidating, we reflect the joint venture's operating revenues of $0.7 million in our condensed consolidated statements of income (loss) beginning as of January 1, 2014. Depreciation and Amortization During the three months ended June 30, 2014, we incurred $9.8 million of depreciation and amortization expense compared to $8.2 million for the three months ended June 30, 2013. The $1.5 million net increase in depreciation and amortization was primarily due to an increase of $2.0 million from properties acquired on or after April 1, 2013, partially offset by a decrease of $0.5 million related to assets that have been fully depreciated. 31



--------------------------------------------------------------------------------

Table of Contents

Interest Expense We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the three months ended June 30, 2014, we incurred $11.0 million of interest expense compared to $10.1 million for the three months ended June 30, 2013. The $0.9 million net increase is primarily related to (i) a $5.1 million increase in interest expense and amortization of deferred financing costs related to the January 2014 issuance of the $350.0 million aggregate principal amount of 2021 Notes (defined below), (ii) a $1.6 million increase in interest expense and amortization of deferred financing costs related to the May 2013 issuance of the $200.0 million aggregate principal amount of 2023 Notes (defined below) and (iii) a $1.0 million increase in interest expense related to the borrowings outstanding on the Revolving Credit Facility during the three months ended June 30, 2014, partially offset by (x) a $6.5 million net decrease in interest expense, amortization of deferred financing costs and premium related to the redemption of the then-outstanding 2018 Notes (defined below) completed in February 2014 and (y) a $0.3 million decrease in interest expense primarily due to decreased interest rates on refinanced mortgage notes and the repayment of a $29.8 million variable rate mortgage note. General and Administrative Expenses General and administrative expenses include compensation-related expenses as well as professional services, office costs, facility operating costs and other costs associated with acquisition pursuit activities. During the three months ended June 30, 2014, general and administrative expenses were $7.9 million compared to $3.4 million during the three months ended June 30, 2013. The $4.5 million increase is primarily related to (i) a $2.9 million straight-line rental income write-off primarily related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity, (ii) a $0.1 million holdback fee expense related to the Forest Park - Frisco contingent consideration, (iii) $0.5 million of facility operating expenses and (iv) a $0.8 million increase in stock-based compensation. The increase in stock-based compensation expense, from $1.5 million during the three months ended June 30, 2013 to $2.3 million during the three months ended June 30, 2014, is primarily related to an increase in stock-based compensation as a result of meeting certain performance criteria under the terms of our performance-based stock units and annual bonuses paid to our management team. Management has elected to receive annual bonuses in stock rather than in cash and therefore changes in our stock price will result in changes to our bonus expense. The increase in stock-based compensation as a result of the annual bonuses to be received in stock is due to the increase in our stock price during the three months ended June 30, 2014 (an increase of $1.21 per share) compared to the three months ended June 30, 2013 (a decrease of $2.90 per share). We expect stock-based compensation expense to fluctuate from period to period depending upon changes in our stock price and estimates associated with performance-based compensation. Loss on Extinguishment of Debt During the three months ended June 30, 2014, we recognized $0.2 million of loss on debt extinguishment. Of this amount, $0.1 million related to the write-offs of unamortized deferred financing costs in connection with the repayment of a variable rate mortgage note and $0.1 million related to fees paid related to the redemption of the then-outstanding 2018 Notes. During the three months ended June 30, 2013, we recognized $9.8 million of loss on debt extinguishment. This amount related to the redemption fee paid and the write-offs of deferred financing costs and issuance premium in connection with the June 2013 redemption of $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes. Other Income (Expense) During the three months ended June 30, 2014, we recognized $0.7 million in other income as a result of adjusting the fair value of our contingent consideration liability related to two acquisitions of real estate properties (see Note 3, "Recent Real Estate Acquisitions" in the Notes to Condensed Consolidated Financial Statements for further details). During the three months ended June 30, 2013, we recognized $1.4 million in other expense as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition. 32



--------------------------------------------------------------------------------

Table of Contents

Comparison of results of operations for the six months ended June 30, 2014 versus the six months ended June 30, 2013 (dollars in thousands):

Six Months Ended June 30, Increase due to Increase / Percentage Acquisitions and Remaining Increase 2014 2013 (Decrease) Difference Originations (1) (Decrease) (2) Revenues: Rental income $ 73,578$ 62,993$ 10,585 17 % $ 11,277 $ (692 ) Interest and other income 10,245 1,304 8,941 686 % 7,349 1,592 Expenses: Depreciation and amortization 19,105 16,468 2,637 16 % 3,600 (963 ) Interest 22,128 20,145 1,983 10 % - 1,983 General and administrative 13,779 8,139 5,640 69 % 637 5,003 Other (expense) income: Loss on extinguishment of debt (22,296 ) (9,750 ) (12,546 ) (129 )% - (12,546 ) Other income (expense) 960 (900 ) 1,860 207 % - 1,860 (1) Represents the dollar amount increase for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 as a result of investments made on or after January 1, 2013. (2) Represents the dollar amount increase (decrease) for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 that is not a direct result of investments made after January 1, 2013. Rental Income During the six months ended June 30, 2014, we recognized $73.6 million of rental income compared to $63.0 million for the six months ended June 30, 2013. The $10.6 million increase in rental income is primarily due to an increase of $11.3 million from properties acquired on or after January 1, 2013, partially offset by a decrease of $0.7 million in rental income. The $0.7 million decrease is primarily due to a $0.2 million decrease related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity and a $0.4 million decrease due to the senior housing facility that is part of our RIDEA-compliant joint venture. The rental revenue related to the senior housing facility that is part of our RIDEA-compliant joint venture is eliminated upon consolidation. Amounts due under the terms of all of our lease agreements are subject to contractual increases, and there is no contingent rental income that may be derived from our properties. Interest and Other Income During the six months ended June 30, 2014, we recognized $10.2 million of interest and other income compared to $1.3 million for the six months ended June 30, 2013. Interest and other income during the six months ended June 30, 2014 primarily consisted of income earned on our 12 loans receivable investments and preferred dividends on our five preferred equity investments. Our loans receivable investments and preferred equity investments had a combined book value of $225.8 million as of June 30, 2014. Interest and other income during the six months ended June 30, 2013 primarily consisted of income earned on our four loans receivable investments and preferred dividends on our two preferred equity investments. These investments had a combined book value of $43.1 million as of June 30, 2013. Interest and other income during the six months ended June 30, 2014 also includes operating revenues associated with consolidation of our RIDEA-compliant joint venture. As a result of consolidating, we reflect the joint venture's operating revenues of $1.3 million in our condensed consolidated statements of income (loss) beginning as of January 1, 2014. Depreciation and Amortization During the six months ended June 30, 2014, we incurred $19.1 million of depreciation and amortization expense compared to $16.5 million for the six months ended June 30, 2013. The $2.6 million net increase in depreciation and amortization was primarily due to an increase of $3.6 million from properties acquired on or after January 1, 2013, partially offset by a decrease of $1.0 million related to assets that have been fully depreciated. Interest Expense We incur interest expense comprised of costs of borrowings plus the amortization of deferred financing costs related to our indebtedness. During the six months ended June 30, 2014, we incurred $22.1 million of interest expense compared to $20.1 million for the six months ended June 30, 2013. The $2.0 million net increase is primarily related to (i) a $9.0 million increase 33



--------------------------------------------------------------------------------

Table of Contents

in interest expense and amortization of deferred financing costs related to the January 2014 issuance of the $350.0 million aggregate principal amount of 2021 Notes, (ii) a $4.5 million increase in interest expense and amortization of deferred financing costs related to the May 2013 issuance of the $200.0 million aggregate principal amount of 2023 Notes and (iii) a $1.5 million increase in interest expense related to the borrowings outstanding on the Revolving Credit Facility during the six months ended June 30, 2014, partially offset by (x) a $12.2 million net decrease in interest expense, amortization of deferred financing costs and premium related to the redemption of the then-outstanding 2018 Notes completed in February 2014 and (y) a $0.8 million decrease in interest expense primarily due to decreased interest rates on refinanced mortgage notes and the repayment of a $29.8 million existing variable rate mortgage note. General and Administrative Expenses General and administrative expenses include compensation-related expenses as well as professional services, office costs, facility operating costs and other costs associated with acquisition pursuit activities. During the six months ended June 30, 2014, general and administrative expenses were $13.8 million compared to $8.1 million during the six months ended June 30, 2013. The $5.6 million increase is primarily related to (i) a $3.0 million straight-line rental income write-off primarily related to a change in ownership of one of our tenants and the resulting modification of the terms of a lease between us and the new tenant entity, (ii) a $0.2 million holdback fee expense related to the Forest Park - Frisco contingent consideration, (iii) $1.0 million of facility operating expenses, (iv) a $0.2 million increase in acquisition pursuit costs from $0.4 million during the six months ended June 30, 2013 to $0.6 million during the six months ended June 30, 2014 and (v) a $0.9 million increase in stock-based compensation. The increase in stock-based compensation expense, from $3.9 million during the six months ended June 30, 2013 to $4.8 million during the six months ended June 30, 2014, is primarily related to an increase in stock-based compensation as a result of meeting certain performance criteria under the terms of our performance-based stock units. We expect acquisition pursuit costs to fluctuate from period to period depending on acquisition activity. We also expect stock-based compensation expense to fluctuate from period to period depending upon changes in our stock price and estimates associated with performance-based compensation. Loss on Extinguishment of Debt During the six months ended June 30, 2014, we recognized $22.3 million of loss on debt extinguishment. Of this amount, $21.7 million related to the redemption fee paid, the write-offs of deferred financing costs and issuance premium and legal fees paid in connection with the redemption of the then-outstanding 2018 Notes and $0.6 million related to the write-offs of deferred financing costs in connection with our mortgage debt refinancing and repayment. During the six months ended June 30, 2013, we recognized $9.8 million of loss on debt extinguishment related to the redemption fee paid and the write-offs of deferred financing costs and issuance premium in connection with the June 2013 redemption of $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes. Other Income (Expense) During the six months ended June 30, 2014, we recognized $1.0 million in other income as a result of adjusting the fair value of our contingent consideration liability related to two acquisitions of real estate properties (see Note 3, "Recent Real Estate Acquisitions" in the Notes to Condensed Consolidated Financial Statements for further details). During the six months ended June 30, 2013, we recognized $0.9 million in other expense as a result of adjusting the fair value of our contingent consideration liability related to the Stoney River Marshfield facility acquisition. Funds from Operations and Adjusted Funds from Operations We believe that net income attributable to common stockholders as defined by GAAP is the most appropriate earnings measure. We also believe that funds from operations ("FFO"), as defined in accordance with the definition used by the National Association of Real Estate Investment Trusts ("NAREIT"), and adjusted funds from operations ("AFFO") (and related per share amounts) are important non-GAAP supplemental measures of our operating performance. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. However, since real estate values have historically risen or fallen with market and other conditions, presentations of operating results for a REIT that uses historical cost accounting for depreciation could be less informative. Thus, NAREIT created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation and amortization, among other items, from net income attributable to common stockholders, as defined by GAAP. FFO is defined as net income attributable to common stockholders, computed in accordance with GAAP, excluding gains or losses from real estate dispositions, plus real estate depreciation and amortization and impairment charges. AFFO is defined as FFO excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and write-offs, non-cash interest income adjustments and amortization of debt premium), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts) and acquisition pursuit costs. We believe that the use of FFO and AFFO 34



--------------------------------------------------------------------------------

Table of Contents

(and the related per share amounts), combined with the required GAAP presentations, improves the understanding of our operating results among investors and makes comparisons of operating results among REITs more meaningful. We consider FFO and AFFO to be useful measures for reviewing comparative operating and financial performance because, by excluding gains or losses from real estate dispositions, impairment charges, and real estate depreciation and amortization, and for AFFO, by excluding non-cash revenues (including, but not limited to, straight-line rental income adjustments and write-offs, non-cash interest income adjustments and amortization of debt premium), non-cash expenses (including, but not limited to, stock-based compensation expense, amortization of deferred financing costs and amortization of debt discounts) and acquisition pursuit costs, FFO and AFFO can help investors compare our operating performance between periods or as compared to other companies. While FFO and AFFO are relevant and widely used measures of operating performance of REITs, they do not represent cash flows from operations or net income attributable to common stockholders as defined by GAAP and should not be considered an alternative to those measures in evaluating our liquidity or operating performance. FFO and AFFO also do not consider the costs associated with capital expenditures related to our real estate assets nor do they purport to be indicative of cash available to fund our future cash requirements. Further, our computation of FFO and AFFO may not be comparable to FFO and AFFO reported by other REITs that do not define FFO in accordance with the current NAREIT definition or that interpret the current NAREIT definition or define AFFO differently than we do. The following table reconciles our calculations of FFO and AFFO for the three and six months ended June 30, 2014 and 2013, to net income (loss) attributable to common stockholders, the most directly comparable GAAP financial measure, for the same periods (in thousands, except share and per share amounts): Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 Net income (loss) attributable to common stockholders $ 12,241$ (3,185 )$ 2,377$ 6,068 Depreciation and amortization of real estate assets 9,755 8,222 19,105 16,468 FFO 21,996 5,037 21,482 22,536 Acquisition pursuit costs 187 229 579 426 Stock-based compensation expense 2,279 1,459 4,792 3,933 Straight-line rental income adjustments (4,247 ) (3,617 ) (8,433 ) (7,300 ) Amortization of deferred financing costs 927 823 1,872 1,589 Amortization of debt premiums - (202 ) (33 ) (401 ) Change in fair value of contingent consideration (660 ) 1,400 (960 ) 900 Non-cash portion of loss on extinguishment of debt 80 508 1,418 508 Non-cash interest income adjustments 70 7 140 12 Write-off of straight-line rental income 2,895 - 2,994 - AFFO $ 23,527$ 5,644$ 23,851$ 22,203 FFO per diluted common share $ 0.50$ 0.13



$ 0.51$ 0.60

AFFO per diluted common share $ 0.53$ 0.15

$ 0.57$ 0.58

Weighted average number of common shares outstanding, diluted: FFO 44,096,297 37,834,496 41,791,470 37,789,804 AFFO 44,335,381 38,190,891 42,075,917 38,125,087 Set forth below is additional information related to certain other items included in net income (loss) attributable to common stockholders above, which may be helpful in assessing our operating results. Please see the accompanying condensed consolidated statements of cash flows for details of our operating, investing, and financing cash activities. Significant Items Included in Net Income (Loss):



During the three and six months ended June 30, 2014, we incurred $0.2

million and $22.3 million, respectively, of debt extinguishment loss. The

$0.2 million of debt extinguishment loss during the three months ended

June 30, 2014 includes $0.1 million related to the write-offs of

unamortized deferred financing costs in connection with the repayment of a

variable rate mortgage note and $0.1 million in additional fees paid related to the redemption of the then-outstanding 2018 Notes. The $22.3 million of debt extinguishment loss during the six months ended June 30, 2014 also includes $20.8 million in payments made to noteholders for early redemption of the then-outstanding 2018 35



--------------------------------------------------------------------------------

Table of Contents

Notes, $0.8 million of write-offs associated with unamortized deferred financing and premium costs and $0.5 million in write-offs of deferred financing costs in connection with our mortgage debt refinancing. The entire amount of the loss on extinguishment of debt is included in FFO for the three and six months ended June 30, 2014. The $0.1 million in fees paid related to the redemption of the then-outstanding 2018 Notes is included in AFFO for the three months ended June 30, 2014, and AFFO for the six months ended June 30, 2014 also includes the $20.8 million early redemption premium. During the three and six months ended June 30, 2014, we recognized $0.7



million and $1.0 million, respectively, of other income, as a result of

adjusting the fair value of our contingent consideration liability related

to two acquisitions of real estate properties. See Note 3, "Recent Real

Estate Acquisitions" in the Notes to Condensed Consolidated Financial

Statements for further details. This entire amount is included in FFO for

the three and six months ended June 30, 2014. During the three and six months ended June 30, 2014, we recognized $2.9



million and $3.0 million, respectively, of straight-line rental income

write-off. The straight-line rental income write-off during the three and

six months ended June 30, 2014 is primarily due to a write-off related to

a change in ownership of one of our tenants and the resulting modification

of the terms of a lease between us and the new tenant entity. This entire

amount is included in FFO for the three and six months ended June 30,

2014.

During the three and six months ended June 30, 2013, we incurred $9.8

million of debt extinguishment loss which consisted of $9.3 million for

the cash payment made to noteholders for early redemption of $113.8

million in aggregate principal amount of the then-outstanding 2018 Notes

and $0.5 million for the write-off of unamortized deferred financing costs

and issuance premiums. The entire amount of the loss on extinguishment of

debt is included in FFO for the three and six months ended June 30, 2013,

and the $9.3 million early redemption premium is included in AFFO for the

three and six months ended June 30, 2013. During the three and six months ended June 30, 2013, we incurred $1.4



million and $0.9 million, respectively, of other expense, as a result of

adjusting the fair value of our contingent consideration liability related

to the Stoney River Marshfield facility acquisition. This entire amount is

included in FFO for the three and six months ended June 30, 2013.

Liquidity and Capital Resources As of June 30, 2014, we had approximately $304.5 million in liquidity, consisting of unrestricted cash and cash equivalents of $15.0 million (excluding cash and cash equivalents associated with our RIDEA-compliant joint venture), and available borrowings under our Revolving Credit Facility of $289.5 million. As further described above under "-Recent Transactions-Equity Offering," we completed an equity offering in May 2014, which provided net proceeds, before expenses, of $219.1 million. A portion of these proceeds was used to repay the $192.0 million outstanding balance under our Revolving Credit Facility. The Revolving Credit Facility provides, subject to borrowing availability limitations, for a borrowing capacity of $375.0 million and includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to an additional $225.0 million, subject to terms and conditions. On January 23, 2014, we completed an underwritten public offering of $350.0 million aggregate principal amount of the 2021 Notes, providing net proceeds of approximately $340.8 million after deducting underwriting discounts and other offering expenses. A portion of these proceeds was used to (i) fund a tender offer for the 2018 Notes, (ii) fund the redemption price for 2018 Notes that were not retired in the tender offer and (iii) acquire the Nye Portfolio. See "-Loan Agreements." On March 18, 2013, we entered into a sales agreement (each, a "Sales Agreement") with each of Barclays Capital Inc., Cantor Fitzgerald & Co., Credit Agricole Securities (USA) Inc., RBC Capital Markets, LLC, RBS Securities Inc. and Wells Fargo Securities, LLC (individually, a "Sales Agent" and together, the "Sales Agents") to sell shares of our common stock having aggregate gross proceeds of up to $100.0 million (the "ATM Shares") from time to time through the Sales Agents. Pursuant to the terms of the Sales Agreements, the ATM Shares may be sold by any method permitted by law deemed to be an "at-the-market" offering, including, without limitation, sales made directly on the NASDAQ Global Select Market, on any other existing trading market for our common stock or to or through a market maker. In addition, with our prior consent, the Sales Agents may also sell the ATM Shares in privately negotiated transactions. We will pay each Sales Agent a commission of up to 2% of the gross proceeds from the sales of ATM Shares sold pursuant to the applicable Sales Agreement. We are not obligated to sell and the Sales Agents are not obligated to buy or sell any ATM Shares under the Sales Agreements. No assurance can be given as to the price or amount of shares that we sell, or the dates when such sales will take place. During the three months ended June 30, 2014, we sold 0.1 million ATM Shares, at an average price of $27.77 per share, generating gross proceeds of approximately $1.9 million, before $39,000 of commissions. During the six months ended June 30, 2014, we sold 0.2 million ATM Shares, at an average price of $27.71 per share, generating gross proceeds of approximately $6.6 million, before $0.1 million of commissions. In addition, as of June 30, 2014, we had $55.2 million available under the ATM Program. 36



--------------------------------------------------------------------------------

Table of Contents

In addition, we have filed a shelf registration statement with the SEC that expires in May 2016, which will allow us to offer and sell shares of common stock, preferred stock, warrants, rights, units, and certain of our subsidiaries to offer and sell debt securities, through underwriters, dealers or agents or directly to purchasers, on a continuous or delayed basis, in amounts, at prices and on terms we determine at the time of the offering. We believe that our available cash, operating cash flows and borrowings available to us under the Revolving Credit Facility provide sufficient funds for our operations, scheduled debt service payments with respect to our Senior Notes (defined below), mortgage indebtedness on our properties, and dividend requirements for the next twelve months. In addition, we do not believe that the restrictions under our Senior Notes Indentures (defined below) significantly limit our ability to use our available liquidity for these purposes. We intend to invest in additional healthcare properties as suitable opportunities arise and adequate sources of financing are available. We expect that future investments in properties, including any improvements or renovations of current or newly-acquired properties, will depend on and will be financed, in whole or in part, by our existing cash, borrowings available to us under our Revolving Credit Facility, future borrowings or the proceeds from issuances of common stock (including through our ATM Program), preferred stock, debt or other securities. In addition, we expect to seek financing from U.S. government agencies, including through Fannie Mae and HUD, in appropriate circumstances in connection with acquisitions. Cash Flows from Operating Activities Net cash provided by operating activities was $28.9 million for the six months ended June 30, 2014. Operating cash inflows were derived primarily from the rental payments received under the lease agreements with subsidiaries of Genesis, rental payments from our other tenants and interest payments from borrowers under our loan investments. Operating cash outflows consisted primarily of interest and early redemption payments on our outstanding debt and payment of general and administrative expenses. Net cash provided by operating activities increased during the six months ended June 30, 2014, primarily as a result of acquisitions and investments that resulted in increased rental and interest income, partially offset by the $20.8 million in payments made to noteholders for early redemption of the then-outstanding 2018 Notes. We expect our annualized cash flows provided by operating activities to increase as a result of completed and anticipated future real estate investments. Cash Flows from Investing Activities During the six months ended June 30, 2014, net cash used in investing activities was $164.0 million and consisted of $118.4 million used in the acquisition of six skilled nursing facilities and three senior housing facilities, $38.4 million used to originate two loans receivable and provide additional funding for existing loans receivable, $6.5 million used for three preferred equity investments and $0.8 million used for tenant improvements. We expect to continue using available liquidity in connection with anticipated future real estate investments and loan originations. Cash Flows from Financing Activities During the six months ended June 30, 2014, net cash provided by financing activities was $145.9 million and consisted of $350.0 million in proceeds from the January 2014 offering of 2021 Notes and $219.9 million in net proceeds from the May 2014 equity offering and shares sold through the ATM Program, partially offset by the redemption of $211.3 million in aggregate principal amount of the then-outstanding 2018 Notes, $37.1 million of dividends paid to stockholders, a net decrease in mortgage borrowings resulting from the repayment of $30.0 million in mortgage indebtedness and $10.1 million of payments for deferred financing costs primarily related to the issuance of the 2021 Notes. In addition, during the six months ended June 30, 2014, we borrowed $80.0 million on our Revolving Credit Facility and repaid $215.5 million during the same period. Loan Agreements 2021 Notes. On January 23, 2014, the Operating Partnership and Sabra Capital Corporation (the "Issuers") issued $350.0 million aggregate principal amount of 5.5% senior unsecured notes (the "2021 Notes"). The 2021 Notes were sold at par, resulting in gross proceeds of $350.0 million and net proceeds of approximately $340.8 million after deducting underwriting discounts and other offering expenses. The 2021 Notes accrue interest at a rate of 5.5% per annum payable semiannually on February 1 and August 1 of each year. See Note 6, "Debt," in the Notes to Condensed Consolidated Financial Statements for additional information concerning the 2021 Notes. 2023 Notes. On May 23, 2013, the Issuers issued $200.0 million aggregate principal amount of 5.375% senior notes due 2023 (the "2023 Notes"). The 2023 Notes were sold at par, resulting in gross proceeds of $200.0 million and net proceeds of approximately $194.6 million after deducting underwriting discounts and other offering expenses. The 2023 Notes accrue 37



--------------------------------------------------------------------------------

Table of Contents

interest at a rate of 5.375% per annum payable semiannually on June 1 and December 1 of each year. See Note 6, "Debt," in the Notes to Condensed Consolidated Financial Statements for additional information concerning the 2023 Notes. 2018 Notes. On October 27, 2010 and July 26, 2012, the Issuers issued $225.0 million and $100.0 million aggregate principal amount of 8.125% senior unsecured notes (the "2018 Notes"), respectively. Pursuant to exchange offers completed on March 14, 2011 and November 14, 2012, the Issuers exchanged the 2018 Notes that were issued in October 2010 and July 2012 for substantially identical 2018 Notes registered under the Securities Act of 1933, as amended. The 2018 Notes accrued interest at a rate of 8.125% per annum payable semiannually on May 1 and November 1 of each year. On June 24, 2013, pursuant to the terms of the indenture governing the 2018 Notes (the "2018 Notes Indenture"), the Issuers redeemed $113.8 million in aggregate principal amount of the then-outstanding 2018 Notes, representing 35% of the aggregate principal amount of the 2018 Notes outstanding. The 2018 Notes were redeemed at a redemption price of 108.125% of the principal amount redeemed, plus accrued and unpaid interest up to the redemption date. The redemption resulted in a $9.8 million loss on extinguishment of debt, including $9.3 million in payments made to noteholders for early redemption and $0.5 million of write-offs associated with unamortized deferred financing costs and issuance premium. On January 8, 2014, we commenced a cash tender offer with respect to any and all of the outstanding $211.3 million of the 2018 Notes. Pursuant to the tender offer, we retired $210.9 million of the 2018 Notes at a premium of 109.837%, plus accrued and unpaid interest, on January 23, 2014. Pursuant to the terms of the 2018 Notes Indenture, the remaining $0.4 million of the 2018 Notes were called and were retired on February 11, 2014 at a redemption price of 109.485% plus accrued and unpaid interest. The obligations under the 2021 Notes and the 2023 Notes (collectively, the "Senior Notes") are fully and unconditionally guaranteed, jointly and severally, on an unsecured basis, by us and certain of our other existing and, subject to certain exceptions, future material subsidiaries; provided, however, that such guarantees are subject to release under certain customary circumstances. See Note 10, "Summarized Condensed Consolidating Information," in the Notes to Condensed Consolidated Financial Statements for additional information concerning the circumstances pursuant to which the guarantors will be automatically and unconditionally released from their obligations under the guarantees. See Note 6, "Debt," in the Notes to Condensed Consolidated Financial Statements for additional information concerning restrictive covenants and events of default in the indentures governing the Senior Notes (the "Senior Notes Indentures"). As of June 30, 2014, we were in compliance with all applicable financial covenants under the Senior Notes Indentures. Revolving Credit Facility. On July 29, 2013, the Operating Partnership entered into an amended and restated secured revolving credit facility (the "Revolving Credit Facility") with certain lenders as set forth in the related credit agreement and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (each as defined in such credit agreement). The Revolving Credit Facility provides for a borrowing capacity of $375.0 million and includes an accordion feature that allows the Operating Partnership to increase the borrowing availability by up to an additional $225.0 million, subject to terms and conditions. The Revolving Credit Facility is secured by pledges of equity by our wholly-owned subsidiaries that own certain of our real estate assets. Borrowing availability under the Revolving Credit Facility is subject to a borrowing base calculation based on, among other factors, the mortgageability cash flow (as such term is defined in the related credit agreement). The Revolving Credit Facility has a maturity date of July 29, 2016, and includes a one year extension option. As of June 30, 2014, there were no amounts outstanding under the Revolving Credit Facility, and we had $289.5 million available for borrowing. Borrowings under the Revolving Credit Facility bear interest on the outstanding principal amount at a rate equal to an applicable percentage plus, at the Operating Partnership's option, either (a) LIBOR or (b) a base rate determined as the greater of (i) the federal funds rate plus 0.5%, (ii) the prime rate, and (iii) one-month LIBOR plus 1.0% (the "Base Rate"). The applicable percentage for borrowings will vary based on the Consolidated Leverage Ratio, as defined in the Revolving Credit Facility, and will range from 2.50% to 3.50% per annum for LIBOR based borrowings and 1.50% to 2.50% per annum for borrowings at the Base Rate. As of June 30, 2014, the interest rate on the Revolving Credit Facility was 3.66%. In addition, the Operating Partnership is required to pay a facility fee to the lenders equal to between 0.35% and 0.50% per annum based on the amount of unused borrowings under the Revolving Credit Facility. During the three and six months ended June 30, 2014, we incurred $0.8 million and $2.0 million, respectively, in interest expense on amounts outstanding under the Revolving Credit Facility. During the three and six months ended June 30, 2014, we incurred $0.4 million and $0.6 million, respectively, of unused facility fees. The obligations of the Operating Partnership under the Revolving Credit Facility are guaranteed by us and certain of our subsidiaries. See Note 6, "Debt," in the Notes to Condensed Consolidated Financial Statements for additional information concerning covenants contained in the Revolving Credit Facility. As of June 30, 2014, we were in compliance with all applicable financial covenants under the Revolving Credit Facility. 38



--------------------------------------------------------------------------------

Table of Contents

Mortgage Indebtedness Of our 130 properties held for investment, 14 are subject to mortgage indebtedness to third parties that, as of June 30, 2014, totaled approximately $125.4 million. As of June 30, 2014 and December 31, 2013, our mortgage notes payable consisted of the following (dollars in thousands): Weighted Average Effective Interest Interest Book Value as of Book Value as of Rate at Maturity Rate Type June 30, 2014 December 31, 2013 June 30, 2014 Date Fixed Rate $ 125,400 $ 54,688 3.96 % May 2031 - August 2051 Variable Rate - 86,640 NA NA $ 125,400 $ 141,328 3.96 % Capital Expenditures There were $0.8 million and $0.2 million of capital expenditures for the six months ended June 30, 2014 and 2013, respectively. There are no present plans for the improvement or development of any unimproved or undeveloped property; however, from time to time we may agree to fund improvements our tenants make at our facilities. Accordingly, we anticipate that our aggregate capital expenditure requirements for the next 12 months will not exceed $2.0 million, and that such expenditures will principally be for improvements to our facilities and result in incremental rental income. Dividends We paid dividends of $37.1 million on our common and preferred stock during the six months ended June 30, 2014. On July 30, 2014, our board of directors declared a quarterly cash dividend of $0.38 per share of common stock. The dividend will be paid on August 29, 2014 to common stockholders of record as of August 15, 2014. Also on July 30, 2014, our board of directors declared the a quarterly cash dividend of $0.4453125 per share of Series A Preferred Stock. The dividend will be paid on August 29, 2014 to preferred stockholders of record as of the close of business on August 15, 2014. Concentration of Credit Risk Concentrations of credit risks arise when a number of operators, tenants or obligors related to our investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to us, to be similarly affected by changes in economic conditions. We regularly monitor our portfolio to assess potential concentrations of risks. Genesis Effective December 1, 2012, Sun was acquired by Genesis, becoming a wholly owned subsidiary of Genesis. In connection with this transaction, we obtained a parent guaranty from Genesis to replace the then-existing Sun guaranty of the lease obligations of its subsidiaries that are tenants under our lease agreements. As of June 30, 2014, 81 of our 130 real estate properties held for investment were leased to subsidiaries of Genesis. During the six months ended June 30, 2014 and 2013, 48% and 63%, respectively, of our total revenues were derived from these leases. Genesis is not an SEC registrant and is not subject to SEC reporting requirements. As of June 30, 2014, Genesis and its subsidiaries operated or managed 371 skilled nursing centers, 33 assisted or independent living centers and 6 mental health centers across 28 states. Genesis also provides rehabilitation therapy services to approximately 1,400 affiliated and non-affiliated centers in 45 states. During the three and six months ended June 30, 2014, Genesis's net revenues were $1.2 billion and $2.4 billion, respectively, and adjusted normalized earnings before interest, taxes, depreciation, amortization and rent were $161.8 million and $313.2 million, respectively. During the three and six months ended June 30, 2013, Genesis's net revenues were $1.2 billion and $2.3 billion, respectively, and adjusted normalized earnings before interest, taxes, depreciation, amortization and rent were $158.5 million and $301.1 million, respectively. As of June 30, 2014 and December 31, 2013, Genesis's long-term debt, net of cash, totaled $455.0 million and $428.0 million, respectively. As of June 30, 2014 and December 31, 2013, Genesis had liquidity of approximately $122.7 million and $153.7 million, respectively, consisting of unrestricted cash and cash equivalents and available borrowings under its revolving credit facility. We have presented below unaudited summary financial information for Genesis as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013. As described above, Genesis has provided a parent guaranty of the lease obligations of its subsidiaries that are tenants under our lease agreements. The summary financial information presented below has been provided by Genesis, is unaudited and has not been independently verified by us. We have no reason to believe that such information is inaccurate in any material respect. 39



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters